Saturday, January 12, 2013

CFPB Adopts Dodd-Frank Act Qualified Mortgage Regulations with Safe Harbor

The Consumer Financial Protection Bureau adopted regulations implementing Dodd-Frank Act requirements that mortgage lenders consider consumers’ ability to repay home loans before extending them credit. The Dodd-Frank Act provides that qualified mortgages are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. However, the Act did not specify whether the presumption of compliance is conclusive, thereby creating a safe harbor, or is rebuttable. The regulations provide a safe harbor for loans that satisfy the definition of a qualified mortgage. The regulations take effect on January 10,  2014.

The Dodd-Frank Act sets certain product-feature prerequisites and affordability underwriting requirements for qualified mortgages and vests discretion in the Bureau to decide whether additional underwriting or other requirements should apply. The regulations implement the statutory criteria, which generally prohibit loans with negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years from being qualified mortgages.

So-called “no-doc” loans where the creditor does not verify income or assets also cannot be qualified mortgages. Also, a loan generally cannot be a qualified mortgage if the points and fees paid by the consumer exceed three percent of the total loan amount, although certain bona fide discount points are excluded for prime loans. The rules provide guidance on the calculation of points and fees and thresholds for smaller loans.

On July 11, 2012, in Congressional testimony, the securities industry urged the Consumer Financial Protection Board to adopt a safe harbor in the qualified mortgage regulations under the Dodd-Frank Act and reject the alternative of a rebuttable presumption which, according to SIFMA, carries the risk of assignee liability. In testimony before the House Financial Institutions Subcommittee. SIFMA senior official Ken Bentsen, cautioned that a rebuttable presumption in the qualified mortgage regulations would have transferred liability to securitizers and investor, SIFMA urged a safe harbor. Given the impact of assignee liability, SIFMA believes it critical that the final rules provide for certainty of compliance with ability to repay requirements.